Choosing a legal structure for your new business is one of the first and most important decisions you must make as an owner. Operating as a sole proprietor offers the benefits of easy set-up and few regulatory requirements, while incorporating your business provides a framework for future expansion. Although every business structure has its advantages, the decision between setting up shop as a sole proprietor or a corporation should be based on a comparison of the differences between the two ways of running a business.

Formation Requirements

A corporation is an independent legal entity, while a sole proprietorship is a business activity operated under the owner's name. Business owners file articles of incorporation with a state business registrar to form a corporation. The incorporation process can cost hundreds of dollars and take a significant amount of time. Comparatively, most states do not require sole proprietors to register before they start doing business. As long as you operate the business under your own name, you can start the business without paying any upfront costs and on your own timetable.

Limited Liability

A sole proprietor is personally responsible for all business debts. Business creditors can satisfy a judgment against your personal assets, such as your house and family bank accounts. Also, a sole proprietorship typically operates under the Social Security number of the owner. Credit transactions involving the business show up on your personal credit report. Incorporation provides shareholders with a liability shield. A business creditor can only satisfy a judgment against the corporation's assets. Also, a corporation has its own taxpayer-identification number and does not use the Social Security numbers of shareholders.

Ease of Management

Corporations are complex business entities that are highly regulated at the state and federal levels. Shareholders must manage a corporation according to the formalities established by law, or else risk losing the protection of the corporate form. Sole proprietors, on the other hand, can run their businesses without having to comply with any management formalities. As the owner, you can run the business in any way that suits your purposes.

Tax Obligations

The Internal Revenue Service classifies a corporation as a taxpayer. Regular corporations must file tax returns and pay taxes on business income at the corporate-tax rate. Sole proprietorships are not required to file a separate tax return for the business. The owner records business income and expenses on his individual income-tax return, making it easier to meet IRS business-tax requirements.

Ownership Restrictions

A sole proprietorship is merely an alter ego of the owner. All business assets and liabilities are in the owner's name, so it can be hard to separate business affairs from personal affairs if the owner wants to sell the business. If the owner dies, the business ceases to exist. A corporation is structured to make it easy to transfer ownership to a third party by selling shares of stock. The corporation also has an independent existence, so it continues to operate even if the shareholders change or die.

About the Author

Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995. Her online articles specialize in legal, business and finance topics. Masters holds a Juris Doctor from Howard University and a Bachelor of Science in business administration with a minor in finance from the University of Southern California.